THE OCTOBER 12 LETTER-RULING OF THE OFFICE OF GENERAL COUNSEL IS EITHER UNLAWFUL OR INEFFECTIVE.

The OGC letter, if treated as a binding substantive ruling, violates the due process rights of AMA and its members. AMA’s members have a substantial economic interest in the CPI price cap formula. The methodology adopted in the OGC letter for computing the Postal Service’s unused rate authority under the CPI cap could subject users of market-dominant products to approximately $360 million per year in extra postage and fees compared with the computation of the price cap formula that AMA and the Postal Service believed was in effect until recently.2 As interested parties, AMA’s
The price cap provisions of Section 3622(d) are designed to protect mailers and the public by limiting price increases to changes in the rate of inflation over time. Order No. 547 at 10-14.

Maintaining the integrity of this structure requires that the price cap reflect periods of deflation as well as inflation. Recognizing increases in the CPI, while disregarding the “additional unused rate authority” accrued under Rule 3010.26(c)(2) whenever its value is negative, would allow the Postal Service to ratchet up its prices over time faster than inflation by refraining from rate adjustments following intervals of deflation.

The resulting distortion in price levels would be large. The difference between unused rate authority of 1.447 percent and unused authority of 0.873 percent, or 0.604 percent, is approximately $360 million per year. Moreover, postal price levels inflated by the use of an excessive rate adjustment factor would become the base rates for future price cap adjustments; hence, the original overcharge would recur in perpetuity (and would be inflated to reflect future changes in the CPI).

Moreover, the divergence between postal rates and the CPI would tend to widen over time. Recurring periods of deflation are not unlikely in the current economies of the United States and the world.5 If the economy alternates between periods of inflation and deflation that leave the CPI roughly flat, selective timing of CPI-based price adjustments could result in postal price increases substantially outpacing inflation over time.

Allowing the Postal Service to exploit the “unused rate authority for the 12 months represented by the annual limitation” (Rule 3010.26(c)(1)), while ignoring the negative “additional unused rate authority” accrued during earlier periods (i.e., the “additional unused rate authority” established under Rule 3010.26(c)(2)), would also violate 39 U.S.C. § 3622(d)(2)(C)(iii)(III), a provision of the PAEA included by Congress to prevent the Postal Service from gaming the price cap through selective application of unused rate authority from prior periods. The provision establishes a first-in-first-out rule: the Postal Service must “use the unused rate adjustment authority from the earliest year such authority first occurred and then each following year.” Id., (emphasis added). The approach embraced in the October 12 letter-ruling of the OGC turns this rule of priority on its head—allowing the Postal Service to exploit its unused rate adjustment authority from the most recent 12-month period first, while leaving implementation of negative unused rate adjustment authority from earlier periods for last—or, more likely, never.

No reviewing court is likely to find this nonsensical outcome consistent with the plain language of 39 U.S.C. § 3622(d)(2)(C)(iii)(III) or the policies of Section 3622(d). Having negative “unused rate adjustment authority” amounts to maintaining rates in excess of the CPI cap. The OGC’s interpretation of the rules would allow the Postal Service to maintain—and increase further—rates in excess of the CPI cap indefinitely.C.

Conclusion

The method of calculating the price cap limitation for the next notice of market-dominant rate adjustment that comports best with the language and structure of the Commission’s rules, and the policies underlying 39 U.S.C. § 3622(d) and the PAEA generally, is to add the interim unused rate authority to the annual price cap limitation, following the calculation method prescribed in 39 C.F.R. § 3010.26. Accordingly, the Commission should clarify that the Postal Service should use the method of calculating the price cap described in these comments—the same method that the Postal Service used in its July 6, 2010 Request in this docket.